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Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Nova Measuring Instruments fourth-quarter 2007 results conference call. (Operator instructions). As a reminder, this conference is being recorded February 19, 2008.
I would like to remind everyone that forward-looking statements for the respective Company's business, financial condition and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Such forward-looking statements include but are not limited to product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development and the effect of the Company's accounting policies as well as certain other risk factors which are detailed from time to time in the Company's filings with the various securities authorities.
I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?
Kenny Green - IR
Thank you. Good morning, everyone, and welcome to Nova's conference call. I would like to thank Nova's management for hosting this call today. With us on the line today are Mr. Gabi Seligsohn, President and CEO; and Mr. Dror David, CFO. Gabi will begin with a summary of the quarter, followed by Dror, who will summarize the financials. Following that, we will open the call to the question-and-answer session.
Now, I would like to hand the call over to Nova's CEO, Mr. Gabi Seligsohn. Gabi, would you like to go ahead, please?
Gabi Seligsohn - President, CEO
Thank you, everyone, for attending today's call. 2007 was an all-time record year for Nova. Revenues exceeding $58 million represented 20% increase over 2006. Q4 revenues also set record revenues of $16 million and marked the Company's third consecutive quarter of profitability on a non-GAAP basis. Cash at the end of the year was $7.7 million higher than at the end of 2006.
Coming into 2007, we spoke of four critical success factors. First, our continued increase in our revenues; second, a move to profitability while generating positive cash flow; third, we continued to increase our market share in our core business of integrated metrology. Lastly and very importantly, we set out a goal of penetrating the standalone market and gaining several new customers. I'm happy to say that all four goals were met successfully.
In the area of integrated metrology, we more than met our goal and broke into the Korean market. The penetration into the Korean market was especially important, bearing in mind that Samsung and Hynix represent jointly over 60% of both the DRAM and NAND flash markets. Having returned from a recent visit with executives of both companies and career, I'm happy to report that Nova was commended for our outstanding product and support capabilities. The reliability and performance demonstrated by our systems and support staff far exceed all expectations, and we have clearly laid a solid foundation for more business in 2008 and the years to come.
During 2007, we also dealt with a few non-yielding activities. We entered 2007 involved in very costly litigation, on which we spent $1.6 million. The settlement of our case with Nanometrics in April removed this drag on earnings. Also in relation to the HyperNex acquisition, we took appropriate action and wrote off $4 million, consolidating operations in Israel, which will help our cost structure in 2008.
In addition and as pointed out in today's press release, we had an impairment charge of $1.4 million for investments and option-rate securities which fell victim to the subprime mess in the US market. Dror will spend a few minutes on that issue and give some more information on that.
Clearly, even though two of the three were non-cash, these items massed much of the past year's success. Having said that, the positive cash flow from operations clearly illustrates a notable improvement in the operation as a whole.
Another major achievement that was not fully reflected in our numbers was our penetration of the standalone segment. We successfully penetrated three more major accounts and now our systems are deployed at DRAM/NAND flash manufacturing fabs as well as leading foundries.
I'm happy to say that in all customer interactions this past year, we were able to demonstrate superiority over our competitors in several key areas including superior cost of ownership, highest throughput and productivity, market-leading fleet matching, high reliability and state-of-the-art advanced modeling capabilities. Given our successful evaluations, we saw a significant increase in standalone bookings in the fourth quarter, and the revenues will be realized throughout 2008.
Now, I'd like to turn a little bit to the year ahead of us -- we're actually in 2008 -- and speak a little bit about what's going on in the industry and what our plans are. First, I would like to point out that being an Israeli company means that we are exposed to the continued devaluation of the US dollar against the Israeli currency. We are constantly monitoring this process and taking necessary steps to mitigate the influence as much as possible.
Coming into 2008, we believe the Company is well-positioned to capture more opportunities for growth. Several factors contribute to our ability to continue growing at a time when the industry as a whole is expected to slow down. And I'd like to mention a few of them.
Eroding memory chip prices require manufacturers to increase the number of chips printed per wafer. To illustrate the importance of device geometry shrinking and the influence on Nova, a typical 300-millimeter wafer of 256 MB DRAM printed at 45-nanometer technology holds over 800 chips, while a 32-nanometer one would hold as many as 2400 chips. As a result of such shrink, manufacturing complexity, of course, increases as does the need for our systems. But I think the economic effects are obvious when dealing with the constantly eroding prices and the importance to the manufacturers is very evident.
Optical metrology is one of the only areas in the $5 billion process control market which is expected to grow in 2008. And we're very well-positioned to capture that growth.
Thirdly, as a company, we have strong exposure to the right segments. Close to 50% of our planned revenues in 2008 will come from the NAND flash space, an area which is estimated by Gardner to grow CapEx by 11% this year. We're also very well-positioned in foundries, which we expect may increase expenses towards the second half of the year.
Fourth is our successful penetration in the area of standalone the last year, which will generate revenues this year as well as repeat orders. We will also leverage our success so far in this area and target the penetration of more customers.
At the high end of the technology curve, we're also encouraged by a building dependence on integrated metrology for etch and lithography with the advent of a process called double patterning. The use of double patterning technique allows printing of lines at tighter proximity but decreases the allowable tolerances of the process and requires much tighter monitoring and control than conventional processing. It is said that double patterning is the only way memory manufacturers will be able to migrate to 32-nanometer technology. And from the previous example given, the need for such migration is very evident.
Nova is already actively engaged in cooperation with its main technology partners, Lam Research, Applied Materials and [Secudo]. We're testing process control solutions for this key area at key customer sites. Bearing all these factors in mind, we believe 2008 will be another year of growth for the Company in both revenues and profitability as well as an increase in cash flow.
Overall industry outlook -- I'd like to say a couple of comments about that. In light of the fact that each segment of the integrated circuit manufacturing is influenced by distinct circumstances, we take a very close look at each segment. It is our expectation that flash memory in 2008 will be up from a capital expenditure standpoint, DRAM will be significantly down, logic will be flat while foundry seems to have the potential of coming back the second half of the year given the high utilization evidenced in the past several quarters.
As stated, we believe we will grow further despite this environment. The evident need to continue to shrink geometries means our customers will be spending a lot of their time and money in developing their next technology node in coming months, rather than increasing capacity. The diversification of our revenues into the area of standalone allows us to capture such business, while our excellent position in integrated metrology will yield more growth opportunities when capacity increases will return.
So, in summary, I am very grateful to our team for great performance in 2007. And I believe our products, presence and capability to continue growing our revenues and profitability in 2008. With that, I'd like to turn it to Dror, who will give more detail on the numbers and also discuss Q4 in more detail as well. Dror?
Dror David - CFO
Welcome to our yearly conference call. Before we start the discussion, I would like to point out two additions that will make the Company's press release which was released today relative to previous press releases. The first addition is periodical cash flow reports. The second addition is the release of non-GAAP net income numbers for all periods with a clear adjustment table between GAAP net income and non-GAAP net income.
The tables appear in the end of the table section in the press release, and the non-GAAP net income results in this table exclude stock-based compensation expenses, amortization of intangible assets and other non-cash charges. We believe that these additions will help investors and analysts to better understand our financial and operational results. Should you have any questions or clarification regarding the non-GAAP details, feel free to contact me through the contact details which appear on the press release.
As Gabi mentioned, we have very well executed our financial plans for 2007. The main financial highlights for the year are 20% revenue growth year over year to $58 million in year 2007, an all-time record yearly revenues for the Company; non-GAAP net income of $3 million or $0.16 per share for the year and $4.6 million positive cash flow from operating activities in 2007.
Revenues from the standalone product line in 2007 were similar to 2006. Yet, we have witnessed an increase in bookings and evaluation orders in year 2007 relative to 2006, concentrated mostly in the fourth quarter of 2007. Overall, during 2007, we have increased the number of customers for standalone products from two customers to five customers. And customer sites in which we are present have increased from seven sites to 11 sites (technical difficulty) same period.
In the standalone product line, we're moving into 2008 with a relatively high backlog and evaluation orders. The larger portion of this backlog is related to first-in-fab bundled hardware and software systems with significantly higher average selling price. However, due to the bundled sales forces based on US GAAP, most of this backlog will be recognized in revenues ratably over a 12-month maintenance period starting at the customers' acceptance dates.
We have already received the first customer acceptance in the end of the fourth quarter. And we expect the remaining acceptances, which depend on customer internal processes, to take place during the first half of 2008.
Sales by territories in the quarter and for the year presented an increase in our sales to Asia-Pacific, which is consistent with industry trend. The actual percentages are as following. In Q4 2007, US represented 27%, Europe 1%, Asia-Pacific 71% and Japan 1%. Overall, in year 2007, US represented 23%, Europe 9%, Asia-Pacific 64% and Japan 4%. Service revenues were $3.2 million in the fourth quarter of 2007 and increased relative to the previous quarters, related mainly to increasing contract revenues as well as increasing sales of time and materials.
On a yearly basis, service revenues increased from $10 million to $11.1 million in year 2007 with most of the increase coming from additional yearly service contracts. As expected, blended gross margins in the quarter improved to 43% relive to Q3 and blended gross margin for the year was also 43%, similar to year 2006. Operating expenses increased to $6.3 million in the quarter, mainly due to enhanced execution of new products, R&D roadmap, marginal costs related to the closure of the facility at State College, Pennsylvania, and the end-year costs.
During Q4 2007, due to effective currency hedging activities which were done throughout 2007, we did not see a significant impact of the devaluation of currencies on our operating expenses relative to Q3. This is despite the fact that the dollar devaluation on average by 6% during Q4 2007 only. During January of 2008 and to-date, we have witnessed the further devaluation of the dollar against all currencies. Although our hedging transactions extend through the first half of 2008, should the current exchange rates stay the same or further devaluate, we will face gradual increase in our operational expenses looking forward.
During the fourth quarter, the Company impaired $1.4 million of the value of $2.9 million short-term investments in auction-rate securities which have recently experienced failed auctions. $0.7 million of this investment is related to CDO of groups of mortgages, and this investment was fully impaired in the quarter. $2.2 million of this investment is in auction-rate securities which are connected to groups of 125 corporate bonds. These investments have recently faced illiquidity; yet, have not faced any kind of default today and have been rated at the time of the investment and also currently rated AAA by known rating agencies.
However, the Company was forced to make the impairment based on US GAAP requirements, mainly due to the short-term illiquidity and related pricing of these investments. All auction rates in the total gross amount of $2.9 million continue to pay monthly interest rates above the LIBOR.
On the net results, the Company presented a third consecutive profitable quarter on a non-GAAP basis with $1 million net income or $0.05 per diluted share in the fourth quarter of 2007. Cash flow wise, the Company presented positive cash flow from operating activities of $4 million in the quarter, attributable mainly to the Company's profitability on EBITDA basis and to favorable DSO.
Overall, during 2007, the Company recorded non-GAAP net income of $3 million or $0.16 per diluted share, with $4.6 million of positive cash flow. And our balance sheet and cash position continues to be strong with approximately $23 million in cash reserves and approximately $21 million of working capital, which will enable us to continue the execution of our business and financial plans for the coming quarters. Gabi?
Gabi Seligsohn - President, CEO
I just wanted to point out that in Dror's words, he stated that the service revenues were $11.1 million. Actually, they were $11.7 million for the year. So please note that correction.
With that, Operator, we would be very happy to take questions.
Operator
(OPERATOR INSTRUCTIONS). Robert Katz, [Sunvest] Capital.
Robert Katz - Analyst
Very nice quarter. Could you give a little more color on what your guidance is for the upcoming quarter and year? As well, what was your book to bill during the quarter?
Gabi Seligsohn - President, CEO
As far as the outlook for the year, as I stated in my comments, the industry as a whole is expected to decline about 10% to 15%, the capital expenditure industry. We expect that we're going to continue to see growth in the year. And the key reason for that actually is going to stem from the success with standalone and our plans going forward in 2008.
So, as you understand the environment right now, especially from the memory space, which as many people know accounts for most of the capital expenditure, and the DRAM, which played a very significant roll in 2007, capital expenditure is going to be less related to capacity increases, obviously, and more related to technology buys from our understanding.
What's going to happen as a result of it is that we're going to enjoy the success we've had so far, we believe, from standalones, since a lot of the buys in these kinds of periods are associated with standalone metrology. So the growth is going to stem a lot from standalone.
As you know, integrated metrology is more capacity related buy. Now, having said that and as I mentioned, the NAND flash market, which we have very well established ourselves in, is expected to grow by about 11%. There, we're going to see also a lot of capacity increases related to the shipments that we make.
So overall, we believe it's going to be a year of growth. As far as -- you asked, I think, a question about bookings. As you remember, Q3 bookings were record bookings for the Company. In Q4, we did see some decline in the bookings level. And coming into the end of the year, we're not commenting, at this point of course, on what's going on in the current quarter. But overall, the year ended with pretty good bookings compared to what we had seen in the past.
Robert Katz - Analyst
What are your expectations for the first quarter or first half of the year versus the second half of the year?
Gabi Seligsohn - President, CEO
Well, I did mention something related to expectations for the year. I think that what's going on right now is that you see people like Samsung pulling in a lot of orders, especially in the area of NAND flash. I think that the competition in that space right now -- it's always been competitive, but I think right now is a very, very competitive time because given the fundamentals of the industry all together and the price erosions that people have seen, those that can spend and increase their market share will do so. So we are seeing, I think, in general that people like Samsung and to some extent also Hynix are pulling in a lot of orders to the first half of the year.
Now, what that's going to do to the second half of the year from the NAND flash side is not exactly clear at this point. What we're also seeing is that the foundries -- and we're hearing that from many people in the industry as well as the foundry themselves -- first, they have announced that they are going to decreases their overall CapEx in the year. Last year was a pretty big year, so overall foundry is going to be down. But there's also an expectation that there will be spending in foundry probably the second half of the year on capacity for the higher end. Because capacity utilization, from the reports that we see at the high end, is getting to be pretty high levels. We don't believe that can hold for quite a long period of time.
Whether or not that plays for a pretty stable year in which, quarter over quarter, things go okay is not exactly clear right now. But those are definitely very interesting and important indicators that I can share with you.
Robert Katz - Analyst
At high end, you mean 70-nanometer or--?
Gabi Seligsohn - President, CEO
Oh, no. When I say high end, yes, 65-nanometer and below is what I call high-end capacity. There, we will be seeing some capacity utilization, as the numbers are pretty high. And I think at some point, there is going to have to be some more buys going on in order to facilitate growth that's going to happen there.
Robert Katz - Analyst
Do you expect to be cash flow positive in all your quarters in 2008, or do you think that's going to be a dip in the first half?
Gabi Seligsohn - President, CEO
We're not giving guidance on cash flow on a quarterly basis, but we're willing to say that for the year we plan on being cash flow positive. I think the work that was done in the past 1.5 years from the operations standpoint and excellent work done by finance puts us in a much better position than we were in the past. So, we're managing this process of collections very, very aggressively. We're working very diligently with suppliers and with customers continuously to control the expense side as well as improve on DSOs.
So you know the guidance for the team internally, of course, is to work aggressively to achieve that. But I can say for the year that we're focused and we can make positive cash flow for the year.
Robert Katz - Analyst
Could you comment on what your expectations are for gross margins for the business and what sort of your business model looks like around that?
Gabi Seligsohn - President, CEO
Well, gross margins, as you saw -- and if you remember, I commented in Q3, in which we saw a different gross margin than we expected -- that in Q4 we're going to return to our pretty normal levels, which is between the 43% and 46% has been our normal level. So we're back at 43% at the end of Q4. And for the year, as you saw as well, we're at 43%.
I think what is going to influence the gross margin -- and I think I have said this many times in the past -- is the change of revenue mix more in favor of standalone business. Another trend that can affect that, of course, is to increase the ASPs in the integrated metrology space, which could happen by adding more content to that product.
Overall, we're targeting and we have a long-term plan to increase our gross margin to higher levels. I think we spoke at the Needham Conference of a multi-year plan to reach 50%. And it's a step approach, in which we look at first of all increasing overall revenues and then on a product-by-product base improving our gross margins.
So for the year, right now, we're not giving guidance. But these levels of 43% are reasonable levels for us. And if we execute on our plan, we should be able to meet those and beat those.
Robert Katz - Analyst
Good luck.
Operator
(OPERATOR INSTRUCTIONS). There are no further questions at this time. Before I ask Mr. Seligsohn to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available in three hours on Nova's website, www.nova.co.il. Mr. Seligsohn?
Gabi Seligsohn - President, CEO
Yes. With that, Operator, I wanted to thank everyone for attending the call. As stated, this was a momentous year for the Company, an all-time record by far, reaching revenues of very close to $60 million. So we're very excited about that, and we're looking forward to another good year and more execution from the team.
Thanks again and hope to see you in the near future.
Operator
Thank you. This concludes the Nova's fourth-quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.